Initial public offerings of equity, share retention, and lockup

In this dissertation I study three aspects of a firm's initial public offering (IPO) of equity: IPO underpricing, IPO long run performance and IPO initial valuation. In my analyses, the shares retained by pre-IPO owners play important roles in all the three aspects.; In part I of the dissertation, I study the relation between IPO underpricing and share retention. I hypothesize that share retention reduces aftermarket liquidity of IPO stocks, while IPO underpricing improves liquidity. Pre-IPO owners have an incentive to improve aftermarket liquidity so that they can more easily sell the shares they retained at a higher price. This leads to the hypothesis of a positive relation between share retention and IPO underpricing. Empirical results are consistent with this prediction. I also find that the positive relation is stronger for IPOs with a lockup provision. A possible explanation is that underpricing can improve liquidity more effectively when there is lockup. I find evidence consistent with this explanation.; In part II of the dissertation, I study the relation between IPO long run performance and share retention. I suggest that Miller's (1977) theory implies a negative relation between share retention and IPO long run performance. Empirical evidence supports this implication. In addition, I find a negative relation between IPO long run performance and initial return. This implies that IPOs are not really "underpriced" relative to fair value. Instead, they are simply underpriced relative to the highest price acceptable to the market.; In part III of the dissertation, I study why pre-IPO owners generally retain a high proportion of the firm's shares. After controlling for factors known to affect IPO price, I find a positive relation between share retention and IPO share price. The results are consistent with the signaling hypothesis, the agency hypothesis, and the imperfect substitute hypothesis. I also correct a misspecification bias in earlier empirical studies.